Fitch unit flags risks from higher oil imports

MANILA, Philippines — The closure of Pilipinas Shell Petroleum Corp.’s Tabangao refinery in Batangas deepens the country’s dependence on fuel imports, which could lead to substantial economic repercussions, Fitch Solutions said in a report.

“The Philippines’ refining sector has been left reeling in the wake of Shell’s decision to permanently close its crude oil refining facility after decades of being in operation,” the Fitch research unit said.

In August, Shell announced the shutdown of its refinery to give way to its conversion into a world-class import terminal, emphasizing that the price of fuel products is now lower than or almost equal to the cost of refining crude oil.

The closure of the refinery leaves the country with only one refinery - Petron Corp.’s Bataan refinery.

“However, the fate of Petron’s plant also appears to hang in the balance, as the firm itself ponders a permanent closure,” Fitch Solutions said, citing news reports quoting Petron CEO and president Ramon Ang claiming such, due to challenging operating conditions and an uncompetitive tax regime for oil refiners.

Fitch Solutions said a potential closure would leave the Philippines fully dependent on imports for its fuels needs.

“Implied import dependence is already forecast to see a big jump to 67 percent over the next five years, from 48 percent averaged in the past decade, although it could rise further depending on the outcome of Petron’s decision,” Fitch Solutions said.

The report pointed out that the Philippines’ fuel import bill has been growing every year since 2016 driven by growing fuel demand, emphasizing that the Philippines would have spent around $600,000 to $900,000 more each year on fuel imports under a zero refinery or a single refinery scenario.

It stressed that as domestic fuel demand is expected to grow over the coming years, the Philippines would have little choice but to raise import volumes in response, barring an unlikely significant upsurge in refining output.

“In our view, greater dependence on energy imports will leave the Philippines economy more tied to fluctuations in global energy prices,” Fitch Solutions said.

“A downsized domestic refining output, next to rising need for imports, is expected to prove a drag on the trade balance over the coming years, creating pressures for the Philippines’ external financing position when domestic demand for energy is rising,” it said.

Fitch Solutions said this creates several risks, including putting an extra burden on the Philippines’ foreign exchange reserves or the ability to attract investors inflows, as well as creating depreciatory pressures for the Philippine peso.

In addition, Fitch Solutions said that risks related to import inflation or disinflation will also become more elevated.

“The Philippines does have reserves buffer (about 7.5 months of import cover) and an inflow of remittances to offset higher import costs in the near term, although as import volumes grow, the risks policymakers need to manage will inevitably grow, potentially resulting in tighter monetary policy over the longer-term,” Fitch Solutions said.

Data from the Department of Energy (DOE) shows that refinery output in the first half of the year fell by 19 percent to 3.88 million liters (ML) from 4.8 ML in the same period a year ago.